Gold Sets Two-Year High - Economic Calendar Special Report

Published on 7/7/2016 by APMEX

Gold futures keep setting new two-year highs, and Wednesday was no exception with the yellow metal finishing at a two-year peak as investors upped their purchase of Gold to guard against economic uncertainty.

On Wednesday, Gold futures closed at $1,367.10 an ounce, their highest finish since March 2014. The Precious Metal is now up almost 30 percent in 2016.

The latest increase in risk aversion was circulating around Brexit, with investors growing increasingly uneasy about the near-term economic impacts after three funds investing in British property said they were suspending trading because too many people were rushing to withdraw their money at once. News of turmoil in Italy, with a referendum scheduled for October, also sparked fears of potential contagion across the eurozone due to Britain’s plan to decouple from the European Union.

There are two major factors currently driving the price of Gold. One is economic and political uncertainty; the other is the future of U.S. rate hikes. While it is currently unclear how these two factors will play out, it is difficult to predict Gold’s future trajectory. With that in mind, it certainly isn’t surprising that there are many different opinions on what is in store for Gold prices in the second half of 2016.

Whenever there is uncertainty in the markets, either due to political or economic conditions, investors look for ways to preserve their wealth, and Gold is one of the top picks. While this can result in a major run-up of prices while the uncertainty persists, a crash is also common whenever the uncertainty ends. When it comes to Brexit and its positive influence, it will be some time before Britain officially parts with the European Union, and even more time before it is known what the full impacts will be on the other European Union nations. This could provide continued support to Gold, but there is also a major negative factor for Gold right now: the potential for the U.S. Federal Reserve to hike interest rates.

Higher interest rates are negative for Gold because when interest rates increase Gold has to compete with yield-baring assets for investor’s interest. While the Fed is keeping a watch on overseas development, it also has to consider its economy when making its rate hike decision.

VanEck Gold and Precious Metals strategist Joe Foster thinks the recent run-up in Gold is just the start of a new bull market. He thinks that the Federal Reserve will struggle to find the time to raise interest rates and that "radical or unconventional" monetary policy around the world and the possibility that U.S. stocks are topping out adds to the concern. Foster did acknowledge that Gold will experience a correction at some point, but thinks the run-up in prices will last through the end of the year.

Wells Fargo's head of real asset strategy John LaForge has a different view. Even after the metal’s massive run-up in the first half of 2016, he thinks that Gold will head back to its lows. His theory is based on tracing commodities trends back to 1800. During bearish commodity super cycles, which last about 20 years, Gold tends to suffer poor performances, even if trade is volatile during the period. This is the type of cycle we are in now, according to LaForge, and it began in 2011. LaForge says the metal’s ascent to a two-year peak was predictable, and that a downturn is now on the way. “Historically speaking, what typically happens when you enter these long bear markets for commodities is they will go back and retest their lows off of the first move down," LaForge said. For Gold, that means it could test its December 2015 lows of $1,050 per ounce, and at that point he thinks the metal would make an attractive buy.